THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

ISLAMABAD (AP) - Pakistani police raided a local security firm that helps protect the U.S. Embassy on Saturday, seizing dozens of allegedly unlicensed weapons at a time when unusually intense media scrutiny of America's use of private contractors has deepened anti-U.S. sentiment.

Two employees of the Inter-Risk company were arrested during the raids in Islamabad, police official Rana Akram said. Reporters were shown the seized weapons - 61 assault rifles and nine pistols. Akram said police were seeking the firm's owner.

U.S. Embassy spokesman Rick Snelsire said the U.S. contract with Inter-Risk to provide security at the embassy and consulates took effect this year. It is believed to be the first U.S. contract for the firm, said Snelsire, who did not have a figure for its amount.

"Our understanding is they obtained licenses with whatever they brought into the country to meet the contractual needs," he said. "We told the government that we had a contract with Inter-Risk."

Akram said he had no idea about any U.S. links to Inter-Risk. A man who answered the phone number listed for the company and identified himself as Riaz Hussain confirmed the raid but gave contradictory answers when asked about any U.S. ties.

The company popped up Friday in one of a slew of local media reports that have focused on private security firms American diplomats are believed to use in Pakistan.

In particular, Pakistani reporters, anti-U.S. bloggers and others have suggested the U.S. is using the American firm formerly known as Blackwater - a claim that chills many Pakistanis because of the company's alleged involvement in killings of Iraqi civilians.

The U.S. Embassy denies it uses Blackwater - now known as Xe Services - in Pakistan.

Scandals involving U.S. private contractors have occurred elsewhere in the region.

In Washington on Friday, the Commission on Wartime Contracting heard testimony about another contractor - ArmorGroup North America - involving alleged illegal and immoral conduct by its guards at the U.S. Embassy in Afghanistan.

Earlier this year, the Iraqi government refused to grant Xe Services an operating license amid continued outrage over a 2007 lethal firefight involving some of its employees in Baghdad, although the State Department has temporarily extended a contract with a Xe subsidiary to protect U.S. diplomats in Iraq.

Many of the reports in Pakistan have been prompted by U.S. plans to expand its embassy space and staff. Among the other rumors the U.S. denies: that 1,000 U.S. Marines will land in the capital, and that Americans will set up a Guantanamo-style prison.

The U.S. says it needs to add hundreds more staff to allow it to disburse billions of dollars in additional humanitarian and economic aid to Pakistan. The goal is to improve education and other areas, lessening the allure of extremism.

Some analysts say Islamist and other opposition groups may be planting the stories in the Pakistani press and blogs to portray Pakistan's government as an American lackey.

Pakistani political analyst Talat Masood said Inter-Risk's association with America "will increase the apprehensions that existed that the Americans are engaged in clandestine activities," and that the raid shows "the Pakistan government is asserting itself."

The U.S. considers stability in Pakistan critical to helping the faltering war effort in neighboring Afghanistan, and has pressed Pakistan to crack down on extremism on its soil. Al-Qaida and Taliban fighters are believed to use Pakistan's northwestern regions bordering Afghanistan as hide-outs from which to plan attacks on Western troops in Afghanistan.

Pakistan has launched offensives against militants, but has also relied on some local militias to help fend off the Pakistani Taliban. Some of these militias share the same aims as the Taliban in Afghanistan, but disagree with targeting the Pakistani government.

On Saturday, one pro-government militia leader said the army had asked him to stop fighting the Pakistani Taliban. Turkistan Bhitani told The Associated Press that he and 24 aides surrendered their weapons to the army in the northwestern city of Dera Ismail Khan and that he had asked 350 of his men to do so as well.

Pakistani army spokesman Maj. Gen. Athar Abbas, however, said he knew nothing of such an arrangement.

Al-Qaida and the Pakistani Taliban have fueled violence in Pakistan, including attacks that pit Sunni Muslims against Shiite Muslims.

Police said Saturday that the death toll from a suicide car bombing at a hotel in a Shiite Muslim-dominated village in Pakistan's northwest rose to 40. The Friday blast in Usterzai village was followed by a bomb in nearby Cho village that killed a Sunni official.

Also Saturday, the army said in a statement that 51 militants had surrendered in the last 24 hours in the northwest Swat Valley, and that another seven were arrested. It also said militants fatally shot five civilians in a minibus there.